In the example taken in Understanding Profit & Loss Statement, There was a net profit of 10000 (10%) on sales of 100000. While we always look for profit after tax, as an investor we should also analyse the expense factors and their impact on net profit.
Here even a 5% increase in raw material cost (50000 x 5% = 2500 Rs) will reduce the profit from Rs. 10000 to Rs. 7500 which is a whopping 25%.
In case of Tyre companies (Apollo & JK) we could see that raw material cost as percentage of net sales is higher for JK Tyre, which will impact its profits. Also the finance cost of JK tyre is on a higher side as compared to Apollo tyre. Hence Apollo Tyre becomes the preferred company between the two. Similarly there are various other factors which impacts the profit margin on the company like, high operational expenses, high other expenses, high manpower cost etc. Also there are some external factors like Govt policies, regulations, import export duties, currency exchange rates, global demand etc which impacts the profit margin of the company. Read Factor Analysis for more details